Microsoft Is Making Mark With Surface

One nice surprise in Microsoft’s quarterly results Thursday were sales of the company’s hardware, especially the Surface tablet.

Surface, Microsoft’s first homegrown computing device introduced 15 months ago, got off to a rough sales start, but has started to find traction. Microsoft’s news release for its fiscal second quarter ended Dec. 31 said revenue from Surface more than doubled from the quarter ended in September to $893 million.

Fresh versions of Surface went on sale in October, and Microsoft sharply discounted the first-generation Surface models. It looks like the one-two punch of new Surface models and cheap, older Surface models helped drive a surprisingly good showing from Microsoft’s hardware business.

Microsoft hasn’t disclosed unit-sales figures for Surface, which went on sale in Oct. 2012, but Morgan Stanley had expected Microsoft to sell 1.4 million Surface units in the quarter ended Dec. 31, up from an estimated 900,000 units in the prior quarter.

Now the bad news: Microsoft remains a tiny, tiny player in the tablet market. IDC has estimated Windows-powered tablets were just 3.4% of the market last year dominated by Google’s Android and Apple. IDC has forecast Windows’ market share will rise to 10.2% in 2017, still a distant number three in tablets.

Microsoft said Thursday that its consumer-hardware business–which includes Xbox videogame machines, sales of some videogames and Surface–posted a 8.7% gross margin in the fiscal second quarter ended Dec. 31. (Reminder: Gross margin is the portion of revenue left after cost to make a product.) Microsoft’s traditional software business long has posted plump gross margins in the neighborhood of 75%.